The Urethane Blog

Negative Outlook

Kevin knows his stuff but stay positive!  Plan for the future and use this time, while others wallow, to gain a competitive advantage.  Just my advice.


ICIS Webinar: US Q2 GDP plunge may reach 8%, crushing chem demand

Author: Al Greenwood


HOUSTON (ICIS)–The US economy could contract by 8% in the second quarter as a result of the disruptions caused by the coronavirus (Covid-19) and the decline in oil prices, the chief economist of the American Chemistry Council (ACC) said in an ICIS webinar on Thursday.

Such a sharp decline in GDP would slow down several petrochemical end markets. ICIS editors highlighted how a downturn could affect major plastics and chemicals, part of a free webinar series ICIS will run through next week.

The coronavirus started off as a supply shock and is now becoming a demand shock, said Kevin Swift, ACC chief economist. He made his comments during the ICIS webinar, “The Impact of Coronavirus on Chemical and Energy Supply Chains”.

Swift made no comments about prices or individual companies during the webinar, in keeping with ACC policy.

Initially, Swift expected that the US had a 40% chance of slipping into a recession. Last week, the chances grew to 50%. Now, it is almost a given.

Currently, Swift expects the US economy will contract by 8% during the second quarter. Under the worst-case scenario, it could fall by as much as 17.5% during the quarter.

He expects Japan, Germany, Italy and several other European countries are already in recession.

The ultimate severity of the downturn will depend on its depth, its ubiquity and its endurance.

For depth, it will vary by industry, Swift said. The hotel and air travel industry will likely see sharp declines. For hotels, occupancy rates fell from 80% a couple of months ago to 10-20%.

He said cruise-ship companies will likely see an L-shaped recovery, in which activity falls sharply and remains low for an extended period.

Service industries will likely take longer to recover, since they often do not experience pent-up demand, Swift said. Consumers do not restock on haircuts if they miss their appointments.

Industries that make tangible goods are more likely to have pent-up demand, so they could see a sharper recovery, he said.

For ubiquity, the effects of the downturn is starting to spread, Swift said. For endurance, he expects that the US is in the early stages.

Already, weekly unemployment claims in the US reached 281,000, up 70,000 from the previous week, according to the US Department of Labor. Swift expects claims will continue rising.

The coronavirus is not the only blow hitting the US economy. It will also suffer from the sharp decline in oil prices, Swift said.

The advent of shale gas and shale oil has turned the US from a large importer of crude oil and refined products to one that is now a net exporter of these materials, Swift said. During the US economic expansion, oil and gas production made up a large portion of the incremental growth of the economy.

While lower oil prices will translate into lower fuel costs, they will do little good if quarantines keep consumers at home, Swift said.

Crude prices have fallen to levels making most of the wells in the US unprofitable, he said. Swift expects rig counts to start falling. Those declines will lower demand for steel and oilfield chemicals.

Such chemicals include surfactants and hydrochloric acid (HCl) used in hydrofracturing (fracking). Epoxy and phenolic resins are used to coat grains of sand to produce proppants.

In addition to low oil prices and the coronavirus, Swift also warned about the build-up in company debt. During the economic expansion, companies took advantage of low interest rates to borrow a lot of money. Those companies are now taking advantage of their credit lines at the same time.

“We are facing a liquidity crisis right now,” Swift said. “We need to make sure this doesn’t go from a liquidity crisis to a solvency crisis.”

The dual effects of lower oil prices and the coronavirus will affect different segments of the chemical industry in different ways, Swift said.

Demand for petroleum additives could suffer because of the decline in fuel consumption.

Restaurants and hotels use a lot of industrial and institutional (I&I) chemicals, so demand for these products could also fall.

Swift did not mention it, but Ecolab warned that it would take a hit to its 2020 earnings because of disruptions to its restaurant and lodging customers, to which it sells cleaner and other janitorial chemicals.

The automobile industry was already struggling for more than a year before the coronavirus. Sales in the US were expected to be 16.50m-16.75m vehicles for 2020, Swift said.

Now, the coronavirus could cause more disruptions to the auto industry. Several automobile producers plan to temporary suspend production at their plants in North America.

Sales will likely fall sharply in the second quarter and that could drag down the annual total.

Light vehicles represent an important market for the US chemical industry, accounting for more than $3,250/vehicle, according to the ACC.

Automobiles make up a key end market for lubricants, which are made with base oils and additives. Supplies were already long for base oils, and the decline in automobile sales and travelling could aggravate the glut, said Jeremy Pafford, ICIS head of North America, market development.

Less driving and lower automobile sales could also lower demand for tyres, a major end market for styrene butadiene rubber (SBR).

Lower oil prices will put pressure on butadiene (BD), said Amanda Hay, ICIS senior editor. Demand for BD and SBR also weakened significantly because of suspended tyre manufacturing.

Goodyear began a phased shutdown of its tyre, retread and chemical plants in the US, Canada, Chile, Colombia and Mexico. Bridgestone will shut down its North and South America manufacturing facilities.

Polyurethanes are also used in automobiles, and demand for these materials could fall because of lower sales and the temporary shutdown of auto plants, said Zachary Moore, ICIS deputy managing editor, Americas.

Polyurethanes are made with methylene diphenyl diisocycanate (MDI), toluene diisocyanate (TDI) and polyols.

Rigid polyurethane foams are used as insulation in housing and buildings. Quarantines are already delaying some construction projects, and they will also discourage home buyers from venturing out to visit properties.

If construction slows down, that could translate into lower demand for polyurethanes and other chemicals used to build houses.

“2019 demand for polyurethanes was not that great,” Moore said. This could be another year that demand was lower than expected, leading to more pressure on prices.

For polyethylene (PE), prices were already low because of new supply outpacing demand, he said. Any downturn could drag down prices further because demand for PE typically rises and falls at multiples of GDP.

The recent decline in oil prices will also pressure PE prices, Moore said. This happened during in 2008, when oil prices fell sharply during the financial crisis.

On the other hand, the quarantines have led to a rise in demand for bottled water, Swift said. That could be a source of demand for polyethylene terephthalate (PET), the plastic used to make such bottles.

Pafford said chemicals used in hand sanitisers and similar products should see a boost in demand.

In Europe, prices spiked for isopropanol (IPA) because of its use in hand sanitisers and the lack of sufficient supplies of ethanol to be used as a substitute, Pafford said.

The rise in paper and tissue purchases could lead to an increase in demand for paper chemicals.

As more people order out for food for restaurants, that could counteract the backlash against single-use plastics used in containers and tableware, Swift said.

Pafford said the coronavirus could lead to long-term effects on consumer behaviour if it lasts long enough. He cited estimates that a vaccine may not be ready for 12-18 months.

At that point, using hand sanitisers could become an engrained consumer habit.

Swift said the coronavirus could be the final blow to extended and complicated supply chains. Companies already had to contend with the disruptions from Japan’s 2011 earthquake and the trade dispute between the US and China, Swift said.

“I think every decision maker is rethinking their supply chains at this point,” Swift said.

Pafford said companies may become more flexible about their employees working from home. This would cause commuting and travel to decline, which would lead to a chain of effects affecting fuel consumption and even automobile production.

The results could make themselves felt in obscure ways. If people drive less, they have fewer automobile accidents. That would lower demand for auto paint.

If more people work from home, they may decide to move to different cities or different states, Pafford said.

Fewer consumers could go on cruises and more could shop online, Swift said.

Online shopping would lead to fundamental changes in packaging. Packaging would have to be durable enough to withstand the abuse from delivery. Online packaging could change the shape and inks of the packaging since they will no longer be displayed on store shelves.

The next webinar will take place on Friday at 1800 hours GMT. It is titled “Global Gas Markets” and it will feature Ben Wetherall, Thomas Marzec-Manser, LNG Analyst and Ed Cox, LNG Editor.

On Monday at 830 GMT, the webinar is “Chemical Supply Chains with focus on Liquid Freight”, featuring Malini Hariharan and Soohwee Pee, Managing Editor Asia and Middle East.

Thursday’s webinar recording is available here.

Sign up here for industry updates on “Making sense of market events: Coronavirus and oil price slumps”. Join the other webinars here.

By Al Greenwood